macsg04 - 4 Demand and Supply Applications C hapter...

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93 4 Demand and Supply Applications C hapter objectives: 1. Explain and demonstrate how the market uses the price-rationing mechanism to allocate resources and distribute output. 2. List nonprice rationing policies designed to supplant the price rationing mechanism, identify the rationale behind these, and analyze their effects. 3. Explain, using words and/or diagrams, how an oil import fee would affect the domestic production and total consumption of oil. 4. Define consumer surplus and producer surplus and explain how these concepts relate to market efficiency. BRAIN TEASER I: The textbook discusses the effects of a price floor such as the minimum wage in this chapter. First, draw a demand and supply diagram to depict the effect of an effective price floor in the labor market. Units of Labor Why might economists oppose the minimum wage? Based on your diagram, what will happen to the number of jobs available if there is a minimum wage increase? Suppose you own a fast-food restaurant—with many of your staff being paid minimum wage. Why might you oppose a hike in the minimum wage?
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94 Study Guide to Principles of Macroeconomics BRAIN TEASER II: Over the years, the U.S. government has developed two distinct strategies regarding illegal drugs. One strategy (“the war on drugs”) has been to cooperate with the governments of countries where drugs are grown in order to destroy the supply at source. The other strategy (the “Just say no” campaign) has been aimed at discouraging drug consumption. Assume the two strategies have the same effect on the equilibrium quantity of drugs traded. Which strategy would you prefer, if you were a drug dealer? OBJECTIVE 1: Explain and demonstrate how the market uses the price-rationing mechanism to allocate resources and distribute output. The price system has two important functions—it allocates productive resources and rations scarce output. Because of scarcity, rationing always occurs. Price rationing distinguishes those who are “willing and able” to buy from those who are only able but no longer willing, i.e., it allocates according to the willingness and ability of consumers to pay—those who are willing and able to pay as the price increases will get the good. Demand is constrained by income and wealth but, within those limits, individual preferences will prevail. If demand increases, price rises, signaling producers that profits may be made. More of the good will be produced, with resources being switched from other lines of production. (page 73) ±±± LEARNING TIP: Note the lobster example in the textbook, which describes the allocative and rationing roles that prices play in the marketplace. Note, too, that the profit motive is highly durable. Limitations (such as price ceilings or rationing) placed on the operation of the market can lead to black markets so that demand can be serviced. ² PRACTICE: In fact, the Maine lobster market is changing. In recent years, catches of lobsters and the average size of the lobsters caught have been increasing. This may be due to global warming—lobsters
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This note was uploaded on 02/13/2010 for the course ECON 1102 taught by Professor Wissink during the Spring '09 term at Cornell.

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macsg04 - 4 Demand and Supply Applications C hapter...

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